I normally don’t like to use inter-market analysis as I prefer to chart each market individually. But on a short-term basis there will often be a story or two that will drive the overall direction of the indexes. Those two right now are obviously the expanding crude oil bubble and the nearly complete trashing of the financials (sort of an inverse bubble). The above chart shows the etf of crude, the USO. I prefer looking at the etf as the futures contract has monthly roll-overs and get a little smoother view with the etf, although the prices on the etf are different. You can see the steady and smooth uptrend. So far nearly every pull-back to the moving averages created a good buying opportunity, especially if accompanyed by an oversold reading in the double stochastic in the sub-graph. For those new these indicators are widely available, and I am using default parameters. I’ve never optimised or curve fitted these indicators. The double stochastic is the stand Bressert 10 period on the black line, and the 5 period on the white line. The moving averages over price are the Ehlers Mesa Adaptive Moving Average. My resource tab has links to more information. I’ve been looking for a top for some time, but as you can see there has been no interruption in the uptrend. Eventually there will probably be a great divergence between price and momentum that will signal the top. I’ve learned my lesson the hard way regarding trying to pick tops using momentum divergences. The eye has a habit of finding great divergences in hindsight, and magically glossing over the many more failed divergences. It is an expensive exercise. It is best, in my opinion, to wait for the trend to first change to down, and then sell the pullbacks up against the declining moving averages, using overbought reading the in the momentum indicator as a guide. One method I use to give me a clue of impending trend change is the commitment of traders report, but this move has even defied some of the normal rules. It appears the commercial interests, at least using the futures only data, have abandoned the short side and have actually gone slightly long. The large traders such as hedge funds have been reducing their commitments, with divergences between their peaks and the price peaks. Yet prices keep climbing. Using the futures and options combined report shows a different picture, with the commercials still net short. Steve Briese, who wrote the book on the subject, which is an excellent book btw, prefers the combined report. He’s the expert. But all my data is futures only. I’ve been keeping the data since before the combined report was available. I resist change.
The other market that is influencing the stock indexes is the financials, and the above chart of the S&P financial etf tells the story. This is a weekly chart. You can see how the xlf has been accelerating to the downside, with expanding bar range and impulse size. As with the crude oil etf, but inverse, each pullback to the moving averages, with overbought momentum readings as a guide, were excellent shorting opportunities. There is no sign of ending this trend yet, however, as you can see, the momentum indicator is deeply oversold. The market feels washed out and depressed beyond logic, just as crude oil seems overdone on the upside, at least to me.
The chart of the indexes (Nasdaq/QQQQ in upper sub-graph, and S&P500/SPY in lower) shows the extent of the recent sell-off. The S&P has retraced nearly the entire recent upmove. The Nasdaq is still holding up near the half way point. Many individual stocks are breaking down far more than the broader indexes would suggest. The advance/decline line I’ve been warning in previous posts shows more clearly the severity of the decline.
Markets normally do cycle back and forth within the context of a trend, and with oversold reading and potential support levels possibly holding in here, there could be some surprise on the upside. A pop in the oil bubble would be a good catalysts, although it is getting widely expected. I would think that if a rally occurs back up into the area of the moving averages, there could be more downside to follow. I just don’t think there is a feeling of capitulation yet. A volume spike on a sell-off, or increasing VIX would show traders throwing in the towel, which would seem to be more constructive longer term.
So why do I keep the baby bull in the upper left corner box? That’s a good question. My posts had been warning of a drop since the advance/decline line turned so negative. I was trying to give the existing trend the benefit of the doubt until the downtrend became more clear, which happened when I was leaving town for vacation. The mood of the market is without question bearish right now. My mood is not so bearish very short term. If a bounce should occur, which is overdue in my opinion, I will have to see how the market reacts when it gets back up into the moving averages, if it does. If it runs into resistance and rolls over, the bear will be back in the box. The market mood box is not a timing indicator, and is not based on any particular indicator or forecast.